New Credit Rating Will Help South Africa's Development

October 10, 1994|By New York Times News Service.

NEW YORK — South Africa has won a long-sought prize from Wall Street: an investment-grade rating from a major credit-rating agency that will make it less costly for the country to borrow money to build roads, provide electricity and create jobs for millions of poor citizens.

Moody's Investors Service Inc., one of the two major firms in the business of evaluating the capacity of corporations and governments to pay back what they owe, awarded South Africa a rating high enough to lift its debt out of the status of a subinvestment grade, or junk, bond.

But the second major rating agency, Standard & Poor's, gave South Africa a rating just below investment grade, in part because the agency said it wanted more time to evaluate the changes in South Africa. But the firm indicated the rating could be raised to investment grade in the next few years.

The higher debt ratings came only months after President Nelson Mandela of South Africa took office, decisively ending the era of apartheid.

While South Africa got a so-called split rating from the two agencies, that puts it in a position comparable to that of several other countries that have been struggling politically and economically. Mexico, for example, has a split rating, even after its substantial efforts to open its markets.

Under the previous all-white government, South Africa's debt was unrated, and for years the nation was unable to borrow money at interest rates it could afford. Many international investors, such as pension funds and mutual funds, will not buy securities of companies or governments that do not have investment-grade ratings.

Now South Africa can draw on the vast international capital markets by issuing bonds and other debt, enabling it to borrow more money for longer periods of time than it could in loans from a bank or group of banks.

South Africa has not put a price tag on its program of reconstruction and development but, over the next decade, the program may total billions of dollars, analysts say.

An investment-grade rating is no guarantee that foreign money will become available. But with such a rating, the multiracial government of Mandela will find a larger number of willing investors in the United States, Europe and Japan.

Split ratings by Moody's and Standard & Poor's are not unusual. Of 43 countries rated by both firms, 20 have split ratings, including Sweden and New Zealand. But the split rating will have market consequences by tempting some potential bond buyers to use the lower rating to demand higher interest rates when South Africa issues debt.

A smaller rating firm, London-based IBCA, gave a subinvestment grade rating to South Africa less than two weeks ago. The firm, which did not have access to South African officials or special government data, cited the nation's challenge of managing "high black expectations of improving living standards even though its own budget deficit is too high."

Moody's gave South Africa its minimum investment-grade rating of Baa3, while Standard & Poor's assigned a rating of BB, which is two notches below investment grade. The S&P rating, however, was accompanied by the notation "with a positive outlook," meaning the rating could be raised in one to three years.